Individual Health Insurance Market with an Entrant – The ACA Health Insurance Exchange Observations

Shi Bo () and Chen Wen ()
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Shi Bo: Accounting and Finance, School of Business and Technology, Morehead State University, Morehead, Kentucky, USA
Chen Wen: School of Business, Providence College, Providence, Rhode Island, USA

Asia-Pacific Journal of Risk and Insurance, 2018, vol. 12, issue 2, 27

Abstract: In this paper, a general framework is built up to model the dynamic of consumer health plan choice and individual health insurance market competition. A primary goal is to identify driving forces to individual health insurance equilibrium market coverage and premium. In the baseline model, we introduce plan quality information search cost as an additional determinant to consumer’s plan choice. Health insurers compete under the Hotelling’s game theory framework. Equilibrium solutions of the baseline model highlight the importance of budget limit and information search cost to health plan enrollment. The more important objective is to examine the impact of market entrants on equilibrium insurance market coverage and plan prices. In the model with market entry, we add an additional dimension to the baseline model. Equilibrium solutions and numerical studies show positive impact of higher insurance market coverage and lower health plan prices. The Affordable Care Act (ACA) brought multiple unprecedented changes to the health insurance market and provided opportunities to study market dynamics and driving forces. The ACA health insurance exchange market experience shows consistency with our model findings even at the early stage of implementation. More importantly, market observations suggest that entry barriers of claim costs and information search cost are high for entrants.

Keywords: market entry; search cost; Health Insurance Exchanges (HIXs); Consumer Oriented and Operated Plans (CO-OPs) (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/apjri-2018-0001

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